SME group blasts gift tax

The Korea Medium Industry Association (KMIA)has proposed that small and midsize companies be exempted from the gift tax on deliberate work placement and exclusive business relationships between affiliates.

The association made the proposal to the Ministry of Strategy and Finance, National Tax Service and Small and Medium Business Association.

The association said that while the original purpose of the bill was to impose a gift tax to discourage conglomerates from deliberately placing work with affiliates to inflate profits, 99 percent of businesses subject to the tax are small and medium enterprises.

The KMIA said the gift tax would have a negative impact on the overall economy by deterring investment by SMEs and complicating job creation.

The gift tax applies to companies with transactions between affiliates that exceed 30 percent of total transactions. The amount of tax is calculated by multiplying after-tax operating profit by the proportion of the transactions between affiliates and by the shareholding ratio between affiliates.

According to a July 16-22 survey of 120 SMEs on their attitudes toward the gift tax on work placement among affiliates, 67.2 percent said the bill was unfair.

Reasons cited were excessive regulations on even regular transactions (35.1 percent), taxing unrealized gains (23.0 percent) and an excessive burden on SMEs (21.8 percent).

About the need for transactions among affiliates, 97.5 percent said they are necessary. Of those, 45.5 said the transactions guarantee a stable supply of products and 25.5 percent said they help to prevent leaks of technology.

Among the 120 surveyed SMEs, 46 of them said they would be subject to the gift tax. The companies’ potential tax liabilities averaged 430 million won ($384,928), with a high of 9.2 billion won.

For countermeasures to the gift tax, 42.7 percent of companies surveyed said reducing transactions between affiliates, 21.3 percent said merging subsidiaries, 16.0 percent said filing lawsuits and 8 percent said moving overseas.

Effects of the gift tax bill on the overall economy were seen as shrinking corporate investment (52.1 percent), establishing fair trade (27.4 percent), decreased global competitiveness (14.5) and less job creation (5.1 percent).

The survey found that 32.8 percent of respondents said SMEs should be excluded from the gift tax, while 25 percent suggested applying different standards for each industry.

BY KIM JUNG-YOON [kjy@joongang.co.kr]